Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2650706 • Letter: Q
Question
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%.
What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
years
What is Project A's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
years
What is Project B's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
years
What is Project B's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
years
Explanation / Answer
Calcualtion of normal payback period
Project A Initial investment = 1400
Payback period is the time taken to recover initial investment
Time taken to recover 1400 = Year 1(700) + Year 2(445) + Year 3 ( 255/270)
= 2.944 years
Project B initial investment = 1400
Time taken to recover 1400 = Year 1(300) + Year 2 (380) + Year 3 (420) + Year 4 ( 300/770)
= 3.3896 years
Calcualtion of discounted payback period
Project A discounted payback period = Year 1 (631) + Year 2 (361) + Year 3 ( 197) + Year 4 ( 211)
= 4 years
Project B discounted payback period = more than 4 years because the NPV of the project is negative
Particulars Year Cash flows Project A Cash flow Project B PVF @ 11% PV project A PV project B Cash inflow 1 700 300 0.9009 631 270 Cash inflow 2 445 380 0.8116 361 308 Cash inflow 3 270 420 0.7312 197 307 Cash inflow 4 320 770 0.6587 211 507